Intel Investing $4.1 Billion in ASML to Speed Production

By Ian King and Cornelius Rahn -
Jul 10, 2012

Intel Corp. (INTC), the world’s largest
semiconductor maker, agreed to invest as much as $4.1 billion in
Dutch chip-equipment maker ASML Holding NV (ASML) in an effort to shave
two years from the time to adopt new production techniques.

The U.S. company said yesterday it will take an initial 10
percent stake in ASML for about $2.1 billion, and later another
5 percent for about $1 billion, pending shareholder approval.
ASML, whose shares rose as much as 11 percent in Amsterdam, is
also in talks with Samsung Electronics Co. (005930) and Taiwan
Semiconductor Manufacturing Co. (2330) to sell as much as another 10
percent of its shares, Chief Executive Officer Eric Meurice said
on a conference call today.

Companies that invest agree to help ASML fund research and
development for the new technologies. Intel wants to speed the
development of a costly, advanced chipmaking technique known as
extreme ultraviolet -- or EUV --lithography, which is used to
make semiconductors that are more powerful even as they become
tinier. It’s also trying to help ASML step up the transition to
a new chipmaking standard that relies on 450-millimeter disks of
silicon, compared with the current 300-millimeter standard --a
shift will enable manufacturers to produce more chips faster.

“It’s a win-win where we get free funding which will help
us in the future, and they get the possibility of appreciation
through this funding,” Meurice said on the call. Europe’s
largest semiconductor-equipment maker may hire as many as 1,200
engineers to roll out of the new technologies faster, he said.

Critical Mass

ASML, based in Veldhoven, the Netherlands, said machines
using 450-millimeter may be available as early as 2018 and will
probably initially be bought by larger customers who can achieve
a critical mass in production. The machines will be about three
to four times as expensive as the 300-millimeter variety, which
may promote consolidation in the chip-making industry, the
company said. Samsung, Intel and TSMC together account for about
41 percent of ASML’s revenue, data compiled by Bloomberg show.

While current-generation equipment costs about 20 million
euros ($24.6 million) to 25 million euros a piece, the price of
that future generation may approach 100 million euros, said
Marcel Achterberg, an Amsterdam-based analyst at Petercam SA.
The company may be able to maintain a gross margin of about
45 percent on the machines with the agreement, he estimated.

ASML will be able to obtain better prices for its products
from its partners by agreeing to the equity investment, Meurice
said on the call. Under the agreement, Intel plans to fund
ASML’s development of the new techniques with about 830 million
euros. The Dutch company said it expects to receive about
1.38 billion euros in development funding from 2013 through 2017
if it sells a total of 25 percent of shares.

Synthetic Buyback

To avoid diluting shareholdings, ASML will carry out a
synthetic share buyback, meaning it pays out the subscription
proceeds to original investors and reduces the number of shares
outstanding.

ASML may raise the minimum price of 39.91 euros a share
that it offers to additional investors after 45 days, depending
on the stock’s performance, Chief Financial Officer Peter Wennink said, adding that the company isn’t handing out voting
shares to customers as it wants to stay “fully independent.”
None of the participating customers may raise their stake to
more than 19.9 percent under the program for six years.

ASML Soars

ASML rose 8.6 percent to 43.15 euros at the close in
Amsterdam today for its biggest daily increase since September
2008. The stock has gained 33 percent this year. Nikon Corp. (7731),
ASML’s main rival, fell the most in more than a year in Tokyo
after the alliance with Santa Clara, California-based Intel was
announced.

“We interpret the move as Intel throwing in the towel on
Nikon,” Pierre Ferragu, a London-based analyst at Sanford C.
Bernstein Ltd., said in a note.

Intel fell 2.3 percent to $25.56 at the close in New York
today. The stock has risen 5.4 percent this year.

“We’re asking for two extremely large technical
transitions to occur at ASML, and it was beyond their
capabilities on their own,” Intel Chief Operating Officer Brian Krzanich said in an interview. Industrywide demand for new ASML
machines means “it becomes a good investment for our
shareholders.”

Intel’s backing will help cut two years off the time it
takes to begin producing chips using both new manufacturing
methods. Intel has used investments like this to create state-
of-the-art factories and production techniques that help set it
apart from other chipmakers.

“Intel realizes they need 450 sooner than anyone can give
it to them,” said Patrick Wang, a New York-based analyst for
Evercore Partners Inc. (EVR) “If they see a limit, down the road,
which presumably they are, you could argue” it’s a good use of
cash. He rates Intel shares equal weight.

Early Access

The transition to larger wafers will deliver a reduction of
30 percent to 40 percent in the cost of a chip, according to
Krzanich. Intel’s cash won’t guarantee early access to the new
tools or give it control over ASML, he said.

Separately, Intel rival Advanced Micro Devices Inc. (AMD)
yesterday said second-quarter sales fell 11 percent from the
previous period, compared with an earlier forecast for a gain of
as much as 6 percent, citing weaker-than-expected sales in China
and Europe, as well as tepid consumer demand.